Conifer Holdings, Inc.
Q4 2019 Earnings Call Transcript

Published: 1 Mar 2020

[Operator:]

Good day and welcome to the Conifer Holdings, Inc. Q4 2019 Investor Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mr. Adam Prior of The Equity Group. Please go ahead.

[Adam Prior:]

Thank you and good morning everyone. Conifer issued its 2019 fourth quarter and year end financial results after the close of market yesterday. On the company’s website, ir.cnfrh.com, you can find copies of the earnings release as well as the slide presentation that accompanies management’s discussion today. If you are looking at that presentation via webcast, you may find that slides are easier to read in a large scale view, which can be selected on the right hand side of the webcast page.Before we get started, the company has asked that I note that except with respect to historical information, statements made in this conference call may constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends, the company’s operations and financial results and the business and the products of the company and its subsidiaries. Actual results from Conifer may differ materially from the results anticipated in these forward-looking statements as a result of risks and uncertainties, including those described from time-to-time in Conifer’s filings with the SEC. Conifer specifically disclaims any obligation to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and is therefore not reconciled to GAAP. We will conduct a Q&A session after management’s prepared remarks this morning.With that, I would now like to turn the call over to Mr. Jim Petcoff, Chairman and Chief Executive Officer. Please go ahead, Jim.

[Jim Petcoff:]

Thank you, Adam. Good morning, everyone. Joining us today from the management team will be Nick, Harold, Andy and Brian.2019 was a continuing year of transition for Conifer. We have currently repositioned our business largely into commercial lines, where we have achieved more favorable results over the long-term and where we are seeing considerable rate increases for select lines. While the timing of this transition has certainly taken a lot longer than we expected as we move into 2020, we feel we are in very solid footing and to see sustained profitable growth going forward. On the top line, we continue to remain focused on our specialty commercial markets, while we are adjusting our personal lines business to avoid the coastal exposure.Our fundamental guiding philosophy is that the top line must only achieve growth that will result in sustainable underwriting profit over time. We are not interested in premium for premium’s sake. As a result, we remain dedicated to our consistent underwriting guidelines, which include achieving long-term rate adequacy. With that in mind, we have been willing to let business non-renew if we felt we are not getting the price we needed to write that business in the first place. What we are seeing in the market now is that we are maintaining a stable written premium base, while strengthening the core underwriting book of business. Going forward, the question becomes when does the book start to build again and the top line growth with it and how is Conifer positioned for that growth? We are focusing our growth in certain specialty niche markets, mainly on the commercial side, where we observed greater rate adequacy. For our company is largely account driven and built on longstanding relationships, but the market is certainly hardening in key areas such as the hospitality and small business.In addition, we have begun to see premium turnaround in our personal lines production, which consists predominantly of low-value dwelling business. This line is performing well for us and does not share the same catastrophe exposures of our old wind exposed business did. In addition, we feel the decision to exit certain cat-exposed markets such as Florida was appropriately timed. Given what we have seen in the industry in recent months, it appears we were well ahead of our peers in the market and are emerging from a recovery process that companies are still facing. So overall, on the premium front, we understood that it would take time to get a level of rate adequacy while repositioning our book over time. Now we are in a good position to take advantage of opportunities that we see in our specialty markets and to generate double-digit top line growth for 2020. Two notable highlights worth mentioning are examples of the strong foundation we have here at Conifer to translate premium increases into profits, namely our fractable operating infrastructure and our solid balance sheet.In 2019, we reported year-over-year expense ratio improvements in each quarter. While the expense ratio has remained elevated in recent years overall, largely a function of lower net earned premium as we pulled back from coastal wind exposed business, we still have the infrastructure in place to support our growth. The systems and infrastructure we put in place when we founded Conifer were built to handle premiums in excess of what we have reported today. Now, we are well-positioned to take advantage of the select growth opportunities we see in our specialty markets. Finally, we have a balance sheet that remains solid. Our investment portfolio is high quality, short duration and well situated for today’s turbulent markets.With that overview, I am going to turn it over to Nick for a bit more color on our underwriting. Nick?

[Nick Petcoff:]

Thank you, Jim. Heading into 2020, we feel comfortable that the company is well equipped for selective top line growth and a return to overall profitability. Three main factors will help drive our growth in 2020. Our recent business shift starts with and is focused on a strong commercial base, complemented by a growing niche, low-value dwelling business in personal lines and lastly supported through a developing agency operation driving fee income. Throughout the past year, we have taken a measured approach to our business mix, which is over 90% commercial with the majority concentrated in our niche underserved classes. In our specialty commercial lines, we are achieving solid rate increases, while selectively increasing market share in many of our core segments, including hospitality and small business E&S products.On the personal line side, we have remained particularly focused on low-value dwelling product offerings. We have taken the approach that an orchestrated and methodical means of growing select personal lines business is our best avenue for sustained profitability in that sector. As a result, we have moved away from wind-exposed markets altogether in which there is a higher degree of volatility and where competitive and legislative conditions that made it challenging to consistently report an operating profit. Yet conversely, the low value dwelling business is an area that historically has performed well for us and even drove growth in premiums written during the fourth quarter. We feel confident heading into 2020 about our personal lines writings having largely exited the wind-exposed business while growing the niche, low-value dwelling business.Finally, we continue to grow our fee-based agency operations, which we anticipate will contribute to non-risk revenue becoming an increasing portion of our overall revenues in 2020 and beyond. We have successfully partnered with globally known carriers and utilized the functionality and expertise of our team and relationships with our agents to deliver a value proposition across several different lines of business. For example, we continue to build out a property agreement with a large nationwide carrier through which we retain the general liability coverage and place the larger property value coverages with them. When it comes to evaluating commercial versus personal versus fee-based business, our collective experience has not biased our judgment in any one direction. We want to write the best business that gives us the greatest opportunity for profit anywhere and every time.Before I turn it over to Harold for a brief review of the financials, I want to comment on our underwriting platform results. Since Conifer’s creation, a hallmark of our company has been our flexible platform between writing on E&S or admitted paper. This flexibility allows us to pivot and participate in select specialty markets where favorable market factors exist. Conversely, we are able to quickly exit other non-performing lines and conditions warrant such a departure, one example being our early exit from Florida wind-exposed business. This strategy has worked well for us in the past and we believe it will prove successful moving forward as well. While we always take a long-term view of our markets, Conifer is at a point where we believe that we can achieve double-digit premium increases for the full year, lower our expense ratio over time and generate a profit for our shareholders.With that, I will turn it over to Harold.

[Harold Meloche:]

Thank you, Nick. I will provide a quick review of the results and then we will open it up for any questions. I encourage investors to review our quarterly filings and our annual report on Form 10-K, which will be filed with the SEC on March 12.Gross written premiums were $25 million in the fourth quarter and $102 million for the year. The slight decrease in the premium volume is due to the ongoing efforts to shift the mix of business to more profitable lines. Conifer’s combined ratio was 112.9% in the fourth quarter compared to 123% for the same period in 2018. For the quarter, our loss ratio was 69% compared to 77% in the prior year period. Before a spike of non-correlated commercial property losses in Q4, the loss ratio in this quarter would have been closer to approximately 60%. The commercial lines accident year combined ratio was 98% versus 105% a year ago and for personal lines, it was 99% versus 113% a year ago. The expense ratio for the quarter decreased to 44.3% from 45.6% in the prior year period and 44% for the full year versus 46% a year ago, an improvement of almost 200 basis points for the full year-over-year comparison.While we have numerous cost-cutting measures underway and continue to see more opportunity for improvement, we are pleased to see trends moving in the right direction. Investment income was $860,000 during the fourth quarter compared to $911,000 in the prior year period. Our investments are conservatively managed, with the majority of fixed income securities, with an average credit quality of AA, an average duration of 3 years and tax equivalent yields of just over 2.5%. In the fourth quarter of 2019, the company reported a net loss of $3 million or $0.32 per share compared to a net loss of $4.8 million or $0.56 per share a year ago.Moving to the balance sheet, total assets were $247 million at year end compared to $233 million at prior year end. Cash and total investments were $177 million at year end compared to $151 million at prior year end. Our book value at year end was $4.45 per share. We have a valuation allowance against the company’s deferred tax assets of $1.41 per share that was not reflected in book value.And with that, I would like to turn it back over to Jim for closing remarks.

[Jim Petcoff:]

Thanks, Harold. Before I turn it over for questions, I want to note that as a management team, we continue to see opportunities for growth. While we always take a measured approach to premiums in general, we do see 2020 as an opportunity for double-digit top line growth as we continue to support our stock and serve as active managers of the company’s capital. We know our primary mandate as operators is to increase shareholder value. And now, we are ready to take any questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Greg Peters with Raymond James. Please go ahead.

[Greg Peters:]

Good morning. Well, it’s been a tough couple of years for you guys. As you think about 2020, clearly and by the way, it’s just not you and there is other companies in the marketplace that have reported really challenging results. As you think about 2020, do you think that you will be able to get back to a position of profitability and what do you think about your accident year loss picks for ‘19? Do you think they are set conservatively enough as you look across the entire enterprise?

[Jim Petcoff:]

Greg, good morning. Two things that you asked there. As far as profitability, yes, we expect any growth in premium will start to move the expense ratio down significantly during the year. We have made tremendous amount of cuts and that cuts that – like we are not cutting things that are necessary to operate effectively, but we have a lean, good, efficient operating machine that is capable and scalable to write additional premium. So we believe that, that expense ratio is going to move down. And even at Northpoint, for those of you who know that where we were before we were never under 40% expense ratio, but we believe we are going to get to that level or below by the fourth quarter of this year with any type of reasonable amount of growth. So from a profitability standpoint, yes, with respect to loss picks, people are – the world is having development on casualty due to whether it’s social inflation or whatever terms you want to use. I would say that we have had developments in geographical areas that have been unfortunate from a judicial and litigation standpoint. We started exiting those in ‘16 and ‘17 and made significant underwriting changes. Some of it probably bled over into ‘18, but when you ask about 2019, we are very comfortable with our loss picks for 2019. And we are very comfortable with our loss picks for 2020 going forward.The thing that we have, I know that it’s been a rough couple of years, but we got out of that Florida homeowners before as soon as we possibly could mitigated our losses there and that was a disaster and you are seeing the results happening on the Florida companies right now. We also did the same thing when the casualty was not going well in certain jurisdictions. And when I talk about getting out of ‘17 – ‘16, ‘17, ‘18 changing our underwriting philosophy in say Pennsylvania liquor, Montana liquor, Southeast Florida, St. Louis area, we really – things that had performed for Northpoint at Northpoint days that we clearly saw a problem or a change in those particular areas. And if you look at the geographic redistribution of our book of business, Michigan is now the number one state. That’s always been an extremely high performing state in Midwest. So we are really comfortable with the areas we are in now and yes, we feel comfortable with the current accident year losses.

[Greg Peters:]

Final question, can you just talk about for the lines of business that are now going to be your areas of focus, can you talk about the rate environment?

[Jim Petcoff:]

I am going to let Nick talk about that.

[Nick Petcoff:]

Sure. It varies quite a bit by geography sort of to Jim’s point on the various results by geography and the litigation environment. In commercial auto, we are still seeing significant rate increases on the physical damage side at high single-digits. The liability is closer to lower double-digit is what we are seeing. General liability, it varies quite a bit on our book due to – based on geography or account history. Accounts that have had losses or in tougher geographies, we are seeing double-digits, sometimes up to 20% rate increases, especially for troubled accounts. In the Midwest, which has been more benign in terms of litigation, the rate increases on the GL are mid single to high single-digits and the property is somewhere in that mid to high single-digit range as well. Work comp is very competitive and we are seeing rate decreases in work comp, but that’s a smaller overall piece of our book today.

[Greg Peters:]

Great. Thank you for your answers.

[Operator:]

Our next question comes from Paul Newsome with Piper Sandler. Please go ahead.

[Paul Newsome:]

Good morning and thanks for the call. I was hoping you could talk a little bit more about your capital position both with respect for your statutory filings and how we should think about it on a GAAP basis just in terms of some RBC ratios, just how comfortable you feel fueling the growth for next year and any thoughts there would be great?

[Harold Meloche:]

Yes, I can start fielding that in. Jim or anyone else can chime in. First of all, our RBC ratios for both companies are very strong. We are quite comfortable where they are at and so – and another rule of thumb that we look at a lot is our net premiums written to surplus both on – both companies are still strong there as well. And from a projected growth rate we have plenty of runway to still grow with the capital we have.

[Paul Newsome:]

Do you have any sort of updated metrics that we should look at from a capital perspective, just in terms of...

[Harold Meloche:]

I think we have some that will be in the 10-K, which comes out March 12.

[Paul Newsome:]

Great. And maybe to move off of Greg’s general question, can you talk about your thoughts about what I think has been the question of the quarter for every company sort of what is happening with rate versus underlying claims inflation. You are recognizing that it does vary by geography, but I think we are all trying to figure out whether or not various companies are actually getting more rate than the underlying claims inflation and just some general sense of what the – if they are getting a positive spread, what – how big that positive spread could be?

[Jim Petcoff:]

For us, I think Nick just talked about the actual rates going up. For us, it’s more about the repositioning of the book of business away from geographies or areas that the litigation costs are so high. And the jury awards are – I mean, the demands – and the jury awards and the functioning of the litigation process in certain areas where they don’t tell you what – they won’t give you any medicals until 2 or 3 years down the road, and they throw them on your desk, and demand $1 million. So those types of things are what’s causing headaches, but we’ve been exiting those for a couple of years. Nick wants to say something.

[Nick Petcoff:]

Yes, I would add to what Jim’s last line there. One of the things that we’ve done and you’ve seen it in the top line, we didn’t see a significant top line growth in commercial lines in the fourth quarter. Part of that was, there were accounts in certain geographies, where we don’t feel that you – with the competitive environment, you can get the rate adequacy that you need. So we have been non renewing and getting out of those areas and really focusing our growth where we feel that you can get rate adequacy given the environment on the casualty side. So on – in certain areas, as it relates to the hospitality, commercial auto, we’ve especially exited because we just don’t feel that the rate is there and focused on the geographies and areas where we do feel that the rate adequacy is there.

[Jim Petcoff:]

In talking about that, we’re able to get rate adequacy on some of the commercial auto, and with the underwriting changes we made in that area, our rates are probably double what they used to be. I don’t know, year-over-year, probably from ‘15 to now, they’re double. So we’re writing essentially the same amount of commercial auto premium, but we have half the exposure. And so there’s you’re going to get to the point where there’s rate adequacy there. Other lines are challenging. But like I said, it’s more geographic. We have rate adequacy in – in our opinion, in the areas we’re writing right now in the Midwest and on our – the different lines of business, whether it’s the hospitality, it’s the specialty area, we are getting enough. We feel comfortable about our loss picks for the current years based on the experience of those books of business in those geographies. And now we have 5 years where we can look back and say, this is what we have experienced from a loss ratio perspective in this geographic area, this is the unearned premium we have, and we can expect those type of results to continue. So we feel we’re able to get rate adequacy in the areas we want to write. Does that answer your question?

[Paul Newsome:]

No, I think so. I mean, it sounds like the summary is that if I have a view of what you’re getting rate versus what you’re getting in claims inflation, that the business mix change will probably far dominate that, much more.

[Jim Petcoff:]

That’s correct.

[Paul Newsome:]

Much more. Okay, thank you very much.

[Operator:]

Our next question comes from Bob Farnam with Boenning & Scattergood. Please go ahead.

[Bob Farnam:]

Yes hi there and good morning. I had a question on the reserves for the commercial lines. Now I know on personal lines, you’ve had continuing issues there with the Florida book, the wind-exposed book, probably more details on the commercial line side. Because I always think as this is your core book, but even there, you’re showing some pretty significant development. Now how much of that development is related to your problem geographic areas like Pennsylvania liquor or Montana liquor? And how much of it is just kind of across the board in terms of the development on the commercial line side?

[Jim Petcoff:]

I’d throw Southeast Florida in there as a troubled area. I would say that 95% of the problem is related to those areas.

[Bob Farnam:]

Okay. So – and you’ve gotten out of those areas or have been trying to get out of those areas. So that’s why you’re thinking going forward, the development is not going to be as much because you’re not writing new business there?

[Jim Petcoff:]

Right. We – I’ll let Nick talk about the timing, but we started to get out of – we meet – I mean, Pennsylvania, we started to get out of the liquor there, but law change in 2015, we saw the results of the law change in 2016, and we started amending our underwriting and getting out of the liquor in Pennsylvania in 2017.

[Nick Petcoff:]

Yes, we started the process of exiting Montana liquor in the end of 2017. So that’s – by the end of ‘18, that was basically all off the books. Pennsylvania started that process in ‘18, really by the middle of ‘19 that was pretty much off the book. Southeast Florida would be an area where we’ve definitely pulled back significantly. We do think on certain risks that we think we can get the rate needed on that book. But we’ve reduced that book significantly. It’s a much smaller portion of the overall book. And the other area that we’ve seen some development would be commercial auto that has – as we’ve mentioned, we’ve been pulling back in that line of business quite a bit as well, the continued trend, while we have had development, it is – we do see a trend of decreasing every quarter. We think that’s going to continue. And another thing I’d note is that while we do make changes to rate, some – the way we manage, especially on the liquor side as well is through limits. So while rates may look like they haven’t moved much on liquor liability in certain states, we’ve reduced limits from $1.5 million down to $100,000 or $300,000. So we’ve been able to manage the more severe losses that are driven from the liquor book through meet control of limits in addition to rate.

[Bob Farnam:]

Okay. So – but it sounds like, at least in the Pennsylvania and Montana, you’ve been – you’ve already gotten out of this business for – you’ve been – you haven’t written any new policies in over a year. So these claims are still lingering. How much – can you give us maybe some more information as to open claims and how they are reserved relative to the limits on those? I’m trying to figure out how much more development we can possibly be getting out of Pennsylvania and Montana, for example?

[Harold Meloche:]

Pennsylvania is going to continue for a little bit. Montana, we’re pretty much done. Pennsylvania has – they have a different statute. They have a writ, they can file a writ, which means it can leave the statute of limitation. It totals a statute of limitation. We went back and we basically forced them to sue us on all of those because the longer it goes, the less you can investigate it, etcetera, etcetera. So Pennsylvania has a little bit longer tail. But we’ve been getting at a lower than limits for the last 3 years. We feel pretty good about the fact that we are not going to see anywhere near the same type of development that we’ve seen prior. Southeast Florida, it’s similar. I don’t know how many – I’d tell you how many claims we had opened from ‘17 and prior, if I knew. But I don’t still know off the top of my head what those numbers are. But I can tell you, ‘16 and prior is very – it’s way down...

[Nick Petcoff:]

Less than 200 plans.

[Jim Petcoff:]

Yes and then anything – yes, the statutes to run on the – that most of those that year. And less than 200 plans for sure in ‘16 and prior. And the ones that have issues or have significant damages or those type of things, we do have reserve and have – we look at those on a regular basis. And we feel that they’re reserved well. However, things do crop up every now and then. Some of them, they may show up tomorrow with a – I’ll give you an example. Yesterday, I was looking at a claim, they haven’t sent us the medical bills in 3 years, right? So we really don’t have an idea of how injured this person is. We don’t think there’s any liability, but we don’t know how injured this person is either. And they hold them all and then they throw them at you at the last minute, as the litigation is getting ripe or to trial. And then year forward, they make it an unrealistic demand, and then you have to deal with that. That’s the kind of stuff that drives the development. Now – and that – I’m specifically talking Southeast Florida and Pennsylvania. So – but we’re having a lot less of those claims and the ones where we do know that there’s significant injuries, we do have reserve conservative what we expect. So I mean, it’s just an ongoing struggle. But look, I don’t want to get too much focus on this because we’re at the tail end of this. I mean, it’s like when we got involved in the Florida, and we started to get out, we knew we were going to have a problem. But that’s pretty much gone. I mean, Florida, we’re still getting water claims from 3 years ago, occasionally, that you know are not true and they want $80,000 and $60,000 in legal fees. But very – so that’s the kind of number you get on that. We think we’re at the downhill side of this. The development are going down every quarter. I think it’s important to note that, in the fourth quarter, it was mentioned by Harold, we had an unbelievably terrible commercial property quarter. We were having a great property year for 3 quarters. If the property losses, I think it was 104% on our commercial property just in the quarter, and it caused about 7 or 8 points on our loss ratio. That was unexpected. So that – if you look at that and then you look at what we expected for some development, we’re in line, but it did happen. So we lost – we – it didn’t work out so well for the quarter. But we feel we’re on the downhill side of that, and we do like our book of business and where we are going.

[Harold Meloche:]

One other comment I’d jump in with. I mean, if you look at kind of two big items for us, I’m hearing it in the comments, obviously, from a reserve side, we feel that we are adequately reserved kind of back to the 2019 question from Greg. But I think also, when we look at rate adequacy in claims inflation, like Paul was talking about, I think Nick handled it relative to where we’re seeing our geographies and the mix of business. That’s not saying that we aren’t experiencing what the industry is seeing, but we think we’re out ahead of it. I think that’s where – Jim is coming from that perspective. But I think if you look at our overall book, where we see ourselves now is, as we see the reserve development continue to decline quarter-over-quarter-over-quarter, as we see the claim counts shutting down, as we look at 2016 and prior, where most of the statutes have run, and then when we take a look at our business on a go-forward basis, people are going to say, well, where are you relative to scale? I think we do feel comfortable that this is now the time, given rate adequacy, given the shift in business mix, given the geographies like Michigan that we’re writing in that have had excellent experience, that you can take the top line forward now. We’re not going to do it in an undue fashion or in – we’ll do it in a measured pace. But something that we see is now is the opportunity for us to get to a little bit more scale that can help drive down the expense ratio.

[Bob Farnam:]

Alright, got it. Yes. It’s just – obviously, it’s hard for us to figure out what’s going on behind the scenes or under the hood, so to speak, when you have the – when you still have the reserve issues or large amount of claims for property kind of creeping up. So we’re trying to get a feel for, alright, what’s really going on under – behind the scenes. I guess, last question for me is relative to your Northpoint days, were there – are there lines that were really profitable at Northpoint that are just not there now? Like, I don’t recall whether or not like Pennsylvania Liquor or Montana Liquor, for example, were really profitable lines of business when you were at Northpoint? I’m just trying to figure out how much – it sounds like you’re trying to replicate a lot of the business that you were writing at Northpoint, but is there much difference in that era versus the era now?

[Jim Petcoff:]

Yes. The two areas where we were very successful at Northpoint that contributed quite a bit of our profitability was Florida Homeowners and Florida GL. And those are the two areas that experienced great difficulty for us at Conifer. The Florida Homeowners is well known and the GL and the court system in Florida has just gone in certain geographies, it’s just difficult to get things done. You can’t – there is no such thing as getting out on the motion anymore. You can make a motion for a summary disposition on something that’s very clear and the judges won’t do it. So you are stocking these litigations much longer. So we saw that and we have been moving out of those areas. But that – those two things, Florida Homeowners and Florida GL were very profitable for us at Northpoint and they are not profitable for us at Conifer.

[Bob Farnam:]

Okay, makes sense. Yes, I was trying to figure out what that – what was driving some of that stuff. Okay, that’s it for me. Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Jim Petcoff:]

I just want to reiterate that with the growth we expect, not huge growth, but reasonable growth, we expect the expense ratio to continue to come into line. We’ve made significant changes, not just on our fixed costs but on the commission side, etcetera. So we expect that to go down from a real dollar terms and also from a percentage, as the – our earned premium increases. And we do expect growth in our core areas, and we are comfortable with, I think, the question from Greg Peters was great one. We are comfortable with our loss picks for ‘19 and ‘20. So thank you for taking the time, and I appreciate your continued support.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.